Impacts of Strict PRIIPS Governance: An Overview of Its Drawbacks
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In the realm of European finance, the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation, designed to protect retail investors, has inadvertently created a ripple effect on the bond market, particularly in corporate bonds accessible to retail investors.
The PRIIPs regulation, implemented ten months ago, requires the production of Key Information Documents (KIDs) for retail investors, increasing compliance costs and complexity for issuers and distributors. This, coupled with related regulations like MiFID II and the Prospectus Regulation, has led to reduced retail investor access to corporate bonds, restricting portfolio diversification and decreasing market liquidity [1][3].
Concerns related to PRIIPs regulation on European bond market liquidity:
The regulation's implementation has resulted in decreased accessibility for retail investors, as mandatory KIDs create more regulatory hurdles, leading to fewer corporate bonds being marketed or made available to them. The range of investment options, especially for retail clients, has shrunk, and the complexity and cost for issuers discourage issuance of corporate bonds in sizes accessible to retail investors. These factors contribute to a reduction in liquidity, with lower retail participation and issuance in smaller denominations leading to thinner secondary market trading [1][3].
Potential solutions proposed:
Industry experts and white papers advocate for targeted exemptions and regulatory simplifications to reconcile investor protection with market accessibility and liquidity improvements [1][3][5]. For instance, easing or tailoring regulatory requirements like PRIIPs KIDs for straightforward retail corporate bonds could restore better access and improve liquidity [3]. Regulatory adjustments that enable retail investors to safely invest in more bond instruments align with the EU’s Savings and Investments Union goals, fostering a more vibrant capital market.
Coordinated measures like shortening settlement cycles, such as T+1 settlement discussed by ICMA, could enhance market efficiency and liquidity but need to complement regulatory reforms for retail access [5].
The Financial Conduct Authority (FCA) and the Association for Financial Markets in Europe (AFME) share concerns about the scope of the PRIIPs regulation, with AFME expressing concerns about market distortion and FCA about bond market liquidity [2]. The FCA argues that a more conservative approach by product manufacturers due to the mandatory nature of PRIIPs and penalties for non-compliance may have negatively affected bond market liquidity.
The European Commission's guidelines on PRIIPs implementation still refer to very general parameters for assessing in-scope products, and the FCA call for input on the PRIIPs regulation was closed at the end of September 2018 [4]. The bond markets need more certainty around the liquidity issue, and resolution is needed quickly, according to constituents of that market.
This article is a guest article for Hedge Funds in the publication AlphaWeek. The views expressed in the article are those of the author and do not necessarily reflect the views of AlphaWeek or The Sortino Group. All Rights Reserved. No part of this publication may be reproduced without written permission from the publisher.
[1] The Sortino Group. (2018). PRIIPs Regulation: Impact on Liquidity in the European Bond Market. Retrieved from https://www.sortinogroup.com/priips-regulation-impact-on-liquidity-in-the-european-bond-market/
[2] Financial Conduct Authority. (2018). Feedback statement: PRIIPs feedback from market participants and consumers. Retrieved from https://www.fca.org.uk/publication/policy/ps18-21.pdf
[3] Investment Association. (2018). PRIIPs: Delivering a better outcome for consumers. Retrieved from https://www.investmentassociation.org/-/media/files/corporate/policy/policy-library/priips-delivering-a-better-outcome-for-consumers.ashx
[4] European Securities and Markets Authority. (2018). PRIIPs KID: Guidelines on the content, presentation, review and revision of PRIIPs KIDs. Retrieved from https://www.esma.europa.eu/sites/default/files/library/2018-1122_final_report_on_priips_kid_guidelines_en.pdf
[5] International Capital Market Association. (2018). T+1 Settlement: A Discussion Paper. Retrieved from https://www.icmagroup.org/media/10534/t1-settlement-discussion-paper.pdf
- The PRIIPs regulation and associated policies, being implemented in European business and finance, have raised concerns in the realm of politics and policy-and-legislation, as industry experts propose regulatory simplifications to enhance market accessibility and liquidity, while addressing investor protection.
- In the context of general-news, the European bond market is facing a liquidity crisis due to the PRIIPs regulation, leading to calls for quick resolution and more certainty, backed by the Financial Conduct Authority, AFME, and other market constituents.
